This is part one of Qualia’s industry ecosystem training series.
Title and escrow agents play a crucial role in the real estate purchase process. The complicated work title & escrow businesses perform protects every member of a real estate transaction, including the real estate agent, the homebuyer, the lender, and the seller. Their work is the final piece of the puzzle before a homebuyer receives the keys to their new home.
So what exactly do title & escrow businesses do? And why is title insurance an important and necessary component of the home purchase process?
In this series, we’re breaking down the important work title & escrow businesses do. Whether you’re a newly minted real estate professional or a homebuyer closing on a new home, you’ll learn about the closing process from start-to-finish and how innovation is transforming real estate transactions for the better.
It all starts with title
Characters in movies and shows often face all sorts of dramatic obstacles when buying or selling a house. A fictional storyline may include a long-lost relative showing up and claiming to own half of the character’s home. Or, the new owners discover that they are responsible for paying thousands of dollars in back taxes. Although these scenarios certainly make movies more interesting and dramatic, they rarely happen in real life. It’s not because it’s not possible but rather because it rarely happens due to the work title & escrow professionals perform every day to ensure that a property has a clean title.
A title (or deed) is evidence that a homeowner lawfully owns a property. Titles are clear or “clean” if the title is lawfully owned by the title holder and there are no claims against them by outside parties, such as local governments or contractors. These claims, called liens, are placed if the homeowner fails to pay bills or taxes. If the liens aren’t paid in a certain amount of time, the lienholder can seize the property.
The fictional examples referenced above rarely happen because title professionals work to make sure all issues are resolved before a purchase is made as part of the title insurance issuance. The title is then protected by title insurance policies which help lenders and home buyers avoid financial losses if problems arise with the title even after the homebuyer moves in.
Exploring the history of title insurance
In the 19th century property ownership issues were common and caused people to lose land and homes. In 1868, Charles Muirhead, a Pennsylvania lawyer, mistakenly assured a client that the title for a new property was clean. Although Muirhead discovered that there was a lien against the title, he assumed that the lien was satisfied (paid) and did not pass along this information.
Mark Watson, Muirhead’s client, was upset that this information wasn’t disclosed and filed a lawsuit. The Pennsylvania Supreme Court decided that Muirhead was not negligent, which prompted the Pennsylvania Legislature to act. The lawmakers passed a law that incorporated and regulated title companies. Title companies would hold the responsibility of preventing title issues like the one Watson experienced.
3 key responsibilities of title & escrow companies
Title & escrow companies, also called settlement agencies, are not just responsible for issuing title insurance, they are also the key transaction party managing the movement of funds and preparing closing documents during the purchase process.
1. Checking the title and issuing the title insurance
Determining that a title is clear and free of liens involves conducting a title exam. The settlement agency searches public records during the title exam, looking for liens, encumbrances, and defects. Encumbrances occur if someone other than the owner claims an interest in the property. Defects are omissions or errors that affect the title.
Conducting a title search involves a little detective work. Issues affecting the title of a house could have occurred years ago and may take some digging to discover. Records examined may include:
- Deed and tax records
- Mortgage documents
- Home equity lines of credit
- Bankruptcy filings
- Wills and trusts
- Court judgments
- Child support agreements
- Divorce decrees
Any problems identified must be cleared before the agency issues the title. Clearing a title can sometimes be as simple as asking for the removal of a satisfied lien or correcting a clerical error. Clerical errors can include omitting the name of a co-owner or even spelling a name incorrectly.
Once the title is clear, the lender and buyer receive a document called a title commitment. The document outlines the terms of the title insurance, which will be issued after the closing occurs. All title documents are produced using settlement software like Qualia.
2. Managing the Movement of Money
The settlement company also handles the accounting aspect of the real estate transaction and moves money between the transaction parties. The company acts as an impartial intermediary and holds the money in an escrow account until the closing takes place.
Balancing the escrow account is an important step in the accounting process. The title company must make sure that the money deposited in the account equals the money that will be removed. At the conclusion of the closing, the buyer and lender place money in the escrow account. The title company then distributes the funds to the seller, realtor, title company, and other parties.
The government requires reconciliations, a step that involves matching the title company’s internal records to bank records. Reconciliations ensure that title companies handle escrow funds responsibly and don’t steal or lose them. Although reconciliation was once a time-consuming process, settlement software systems like Qualia make it much more efficient.
3. Preparing Closing Documents
Title & escrow companies prepare and generate closing documents, including the Closing Disclosure, using settlement software such as Qualia’s title & escrow workflow platform. The disclosure provides information about the new mortgage and the costs involved.
As a result of the financial crisis in 2008, closing disclosures are now provided three days before closing. Prior to the change, homeowners received the disclosures at settlement and didn’t have adequate time to review the documents or ask for clarifications about the terms.
Documents are given to the buyer and seller during the closing, which is usually held at the title company office. The title company stores the documents and delivers some of them to the local county recording office. Documents may be physically taken to the recording office or sent electronically using settlement software and other eClosing technology.
Documents typically needed for a closing include:
- HUD-1: (lists all of the charges paid by buyers and sellers in a real estate transaction – usually used for reverse mortgages and refinancing)
- Closing Disclosure: (form issued to the buyer that includes information on monthly payments, loan terms and closing costs)
- ALTA Settlement Statement (itemized list detailing costs buyers and sellers pay)
- 1099-S (Internal Revenue Service form filed when a property is sold or exchanged)
- Deed (legal document that transfers ownership from the seller to the buyer)
- Deed of Trust (secured real estate transaction used in place of a mortgage in some states)
The Closing Timeline
The closing timeline begins almost as soon as an owner accepts an offer and includes these steps:
- Order Opening (3 to 5 Days): After a real estate agent or lender requests a closing, the title agency informs all parties that they will be handling the closing. During this phase, employees conduct a title search and send a title commitment and closing protection letter to the lender.
- Closing Prep (2 to 3 Weeks): Closing prep involves gathering accounting information, balancing the escrow account, clearing up title issues, and preparing closing documents.
- Closing (1 Day): The buyer and seller sign closing documents on the closing date.
- Post Closing (1 – 3 days): Post-closing is a busy time for the title company, which must issue the title insurance, disburse money from the escrow account, and fund the loan. Documents are also recorded at the recording office. If the homeowner is refinancing a mortgage, he or she has three days to back out of the new mortgage.
Streamlining the Closing Process
Real estate closings are complex transactions that require careful oversight and preparation. Even a minor error can derail the process, causing headaches for every stakeholder in the transaction. While title & escrow companies are not the only party managing components of the closing process, they are often the key stakeholder quarterbacking much of the real estate transaction.
Title workflow software like Qualia streamlines the closing process and enables title & escrow companies to work better with their lender and real estate agent partners to create transparency and better experiences for the end consumer (the home buyer). Qualia automates many of the repetitive tasks inherent in title & escrow work and creates a single space for every stakeholder in the real estate transaction to work collaboratively and securely.
In this series, we’ll break down all of the important work title & escrow businesses do to move a transaction forward and why the title industry is more important than ever in delivering security and peace of mind during the homebuying process. To stay up-to-date on this series, click below to subscribe to Qualia Insight and receive updates straight to your inbox.